Down On The Farm: Looking At The Agribusiness ETF
The Market Vectors Agribusiness (ETF) (NYSE: MOO) has lagged the S&P 500 over the past several years, but with the materials sector and agriculture commodities prices rebounding this year, 2016 could turn out to be one of MOO's better annual performance's in recent memory.
The Index, Holdings And Allocations
MOO, which came to market nearly nine years ago, is home $851 million in assets under management. The ETF follows the MVIS Global Agribusiness Index (MVMOOTR). That index “is intended to track the overall performance of companies involved in: (i) agri-chemicals, animal health and fertilizers, seeds and traits, (ii) farm/irrigation equipment and farm machinery and/or (iii) agricultural products (including grain, tobacco, meat, poultry, and sugar), aquaculture and fishing, livestock plantations, and trading of agricultural products,” according to VanEck.
MOO holds 52 stocks, but the ETF is top heavy as its top 10 holdings accounted for almost 59 percent of its weight as of the end of the second quarter. An interesting point is that MOO's long-term correlations to agriculture commodities prices are not as tight as some investors would be apt to guess.
The Role Of Ag
“Agriculture commodity prices have a significant impact on the performance of most agriculture businesses because their customers' income and demand for inputs, such as tractors and fertilizer, is tied to grain prices. But the fund's performance has been only moderately correlated with commodity prices during the past five years. That’s because there are other factors, like expenses and product life cycles, that can influence these firms’ profitability. And demand for yield-enhancing products isn’t entirely driven by grain prices. Harvest size can also have an impact,” according to Morningstar.
Like diversified materials ETFs, MOO is benefiting this year from industry consolidation. For example, Monsanto Company (NYSE: MON) is a confirmed takeover target, though some industry analysts believe another suitor could emerge for Missouri-based company. Additionally, Potash Corporation of Saskatchewan (USA) (NYSE: POT) is also believed be in play. Monsanto and Potash combine for 12.3 percent of MOO's weight.
Over 51 percent of MOO's holdings are U.S.-based companies with a combined 23 percent hailing from Canada, Switzerland and Japan. An issue for long-term investors is that the agribusiness industry is extremely competitive, meaning nearly all of MOO's holdings can be vulnerable to other players in the business.
“Only a handful of the fund's holdings, representing about 41 percent of its assets, carry a wide or narrow Morningstar Economic Moat Rating. Consequently, competition may erode the profits of many of the fund's holdings over the long term,” added Morningstar.
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